Illinois Supreme Court overturns state's landmark 2013 pension law

By Doug Finke, State Capitol Bureau

Friday

May 8, 2015 at 10:45 AMMay 8, 2015 at 10:24 PM

The Illinois Supreme Court on Friday struck down the state's landmark pension reform law as unconstitutional.

The unanimous decision by the court leaves Gov. Bruce Rauner and lawmakers back at square one in trying to address the state's massive $111 billion debt for the worst-funded pension systems in the nation.

The decision, written by Justice Lloyd Karmeier, said the 2013 law violated the pension protection clause of the Illinois Constitution, which says pension benefits cannot be diminished or impaired.

"In enacting the provisions, the General Assembly overstepped the scope of its legislative power," Karmeier wrote. "This court is therefore obligated to declare those provisions invalid."

** Read a summary of the court's pension ruling here or the entire ruling here. **

In late 2013, the legislature passed the pension reform bill, which applied to downstate teachers, university workers, state employees and lawmakers. There are more than 467,000 active and retired members of those systems. Judges were exempt from the law.

The law made a number of changes designed to reduce the state's overall pension debt and also the amount the state had to pay each year to maintain the pension systems. Those annual payments have increased to about $7 billion, putting the squeeze on the state's ability to pay for other programs.

The legislation raised the retirement age for younger workers, capped the salary on which a pension can be earned, limited annual increases in pension benefits, and eliminated some of the raises due retirees. Each of those, Karmeier wrote, "directly reduces the value of retirement annuities for those member."

Karmeier said promised pension benefits are essentially locked in place at the time someone joins one of the pension systems.

"Accordingly, once an individual begins work and becomes a member of a public retirement system, any subsequent changes to the Pension Code that would diminish the benefits conferred by membership in the retirement system cannot be applied to the individual," he wrote.

Attorneys for the state argued that the state's precarious financial situation allowed changes in pension benefits because the state can exercise police powers in a crisis. The court didn't accept that argument.

"The General Assembly may find itself in crisis, but it is a crisis which other public pension systems managed to avoid and … it is a crisis for which the General Assembly itself is largely responsible," Karmeier said.

The existence of such a crisis does not mean the law can be ignored, the court said.

"The financial challenges facing state and local governments in Illinois are well known and significant," Karmeier wrote. "In the ruling we have today, we do not mean to minimize the gravity of the state's problems or the magnitude of the difficult facing our elected representatives. It is our obligations, just as it is theirs, to ensure that the law is followed. Crisis is not an excuse to abandon the rule of law."

The 38-page opinion outlined the long history of the state not putting enough money into the pension systems and the warnings that were issued about it going back to 1917.

Moreover, the court said the pension reform law was an attempt to fix the state's financial problems on the backs of public employees. The court said other options were available, such as raising taxes or restructuring the pension fund debt.

"(Pension reform) was in no sense a last resort," the court said. "Rather, it was an expedient to break a political stalemate."

Rauner's office said the decision affirmed his belief that the pension reform law was unconstitutional.

"What is now clear is that a Constitutional Amendment clarifying the distinction between currently earned benefits and future benefits not yet earned, which would allow the state to move forward on common-sense pension reforms, should be part of any solution," the office said in a prepared statement.

The next regular chance to put a constitutional amendment before voters is November 2016. Meanwhile, Rauner's proposed budget for next year assumes $2.2 billion in savings from pension reform. (The state did not include any potential savings from the pension reform law in the current state budget.) The governor has proposed a plan to freeze benefits already earned by workers but then move them into a 401(k)-style plan for future benefits.

"I think this ruling makes clear the governor's pension proposal is not an option," Biss said. "It makes very clear that at least $2.2 billion the governor has budgetary assumptions are simply unachievable."

Rep. Elaine Nekritz, D-Northbrook, another author of the pension reform law, said the decision limits options open to lawmakers for dealing with pension costs.

"The goal of the pension legislation was to try to provide balance between all of the competing demands on our limited resources," she said. "I think this clearly takes away one avenue to achieve this balance."

She agreed restructuring the pension debt, as mentioned in the opinion, could be done, but "that makes this a problem the citizens of Illinois will be paying for for the next 50 years."

"That makes me very sad for the future of our state," Nekritz said.

Moody's Investors Service said it was reviewing the court opinion "and analyzing its potential impact on the credit condition of the state of Illinois, the city of Chicago, public universities and other Illinois municipalities and school districts."

"For the state, Moody's current rating and outlook did not factor in the proposed pension reforms, but the ruling provides additional evidence that pension benefit reductions will not be permitted," the ratings agency said.

Senate President John Cullerton, D-Chicago, initially supported a different reform plan that he negotiated with public employee unions. It saved less money than the plan that was passed, however.

Cullerton issued a statement saying he was concerned all along that the pension reform bill was unconstitutional.

"This ruling is a victory for retirees, public employees and everyone who respects the plain language of our Constitution," he said in a written statement. "That victory, however, should be balanced against the grave financial realities we will continue to face without true reforms."

House Minority Leader Jim Durkin, R-Western Springs, said he disagreed with the ruling, but he pledged to work on a different reform plan. Senate Minority Leader Christine Radogno, R-Lemont, said she will also work to find a plan that is constitutional.

Illinois AFL-CIO president Michael Carrigan, speaking for the We Are One Illinois coalition of public employee unions, praised the decision and said unions will work with lawmakers "in developing a fair and constitutional solution to pension funding."

That sentiment was echoed by Rep. Tim Butler, R-Springfield, who said: "If we are going to move forward with any type of pension reform, then we need to make sure all the folks are at the table. With the law that was thrown out today, I think there were groups — especially labor unions — that I don't believe were at the table for final discussions and negotiations, and that played a huge factor in the law being invalidated."

Sen. John Sullivan, D-Rushville, said the idea of restructuring the pension debt is something he's long suggested. He also said costs could be reduced if the state sets a long-term goal of 90 percent or 80 percent funding rather than trying to achieve 100 percent funding of the pension systems.

The State Universities Annuitants Association, one of the plaintiffs in the case, said the decision "is a victory for retired and current members of the State Universities Retirement System and other public employee retirement systems."

"As a result of this opinion, employees retiring from the state of Illinois should have confidence in their pensions," the association said.

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